Another global recession

Barely eight years after the 2008 global economic meltdown, economists are again talking of another worldwide recession. Just a few years ago the BRICS – Brazil, Russia, India, China and South Africa – were poised to join the Group of Seven – USA, Canada, United Kingdom, France, Germany, Italy and Japan among the economic superpowers. Today, Brazil and Russia are already suffering from economic recession (negative economic growth), South Africa is stagnating and India is not growing as fast as predicted. But if there is a global economic recession, the main cause will be the continuing economic slump in China.

In the United States, the slow growth has also been caused primarily by the rise in income inequality. The increase in wealth is going to the top one percent that controls 99 percent of the wealth worldwide. In the United States, real wages have remained flat so that consumer sales has remained flat even as the economy grows.

According to JP Morgan, the savings rate in the USA remains at five percent or twice what it should be at their present economic growth. The reason is that only the very wealthy feel financially secure and also there are only a limited amount of cars, homes and luxury items that the rich can buy. Even in the center of capitalism, the “trickle down” theory is not working. The wealth of the rich is not trickling down to the poor and even to the middle class.

The situation is much worst in China. The Chinese government says the country’s economy is growing at close to seven percent a year. However, a Morgan Stanley report says that the growth figure is actually closer to four percent a year. The reason a global recession could happen is because China and emerging nations, e.g. Brazil, Indonesia, South Africa, that are dependent on commodities exports to China, make up around 40 percent of the world’s economy.

An economist has recently described China as more of a “Bubble Kingdom” than the Middle Kingdom. Aside from a stock market crash, there is still a housing bubble, manufacturing bubble, and infrastructure that will not pay for itself. For example, there are so many malls that will not even be able to generate the revenues to pay for the cost of construction. But the most worrisome is that China has developed a debt bubble which has grown up to three times the rate of the subprime debt bubble that caused the financial meltdown in the United States in 2008.

A Bloomberg report is more even handed in its analysis. It says: “All of the pieces are in place for a financial crisis in China. The currency is weakening and, if left to the market, would likely plunge further. Capital flows have hit record levels. Reserves are in retreat. A dramatic sell off on Shanghai’s stock market has wiped out all the gains from 2015’s bull run. The leadership usually lauded for its sagacity has at times seemed befuddled about what to do.”

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It should be noted that the most worrisome sign about a possible economic collapse in China is that its wealthy elite sent out almost $1 trillion in 2015, mostly through money laundering and tax evasion means. This has been taken as a clear sign that the economic elite of China have no confidence in their own country and are voting by pouring their personal wealth into investments in other countries.

While recent economic woes could already have caused the collapse of other emerging economies, the report says: “ Yet so far China has avoided the kind of edge-of-your-seat financial meltdown Wall Street experienced in 2008, and Thailand, Indonesia, and South Korea did in 1997. Indeed there is a good case to be made that China never will. The state commands such tremendous power over everything from capital movements to the banking system that policy makers might be able to prevent the world’s second largest economy from flying completely off the rails.”

While the economic solutions are clear, the problem is whether the present government is willing to introduce reforms that may endanger the monopoly of power by the Communist Party.

The Bloomberg report says: “ Terrified of the political fallout from a slowing economy, the central bank has been loosening money; credit growth is accelerating. Meanwhile, the stimulating effect from this flood of lending appears muted, a sure sign that the new cash is being used unproductively. This means the weight of China’s debt burden will continue to increase and the inevitable damage will be even greater.”

In any recession, the most obvious consequence will be overcapacity that must be allowed to downsize. As a result of the housing bubble in the United States, construction of new houses almost disappeared for several years until supply begun to equal demand. The effect, however, is loss of jobs. In the United States, unemployment rose from four percent to around 10 percent before the economy started recovering.

In China, there is a clear and massive overcapacity in the manufacturing sector. China should conduct downsizing of industry which authorities say they have started. But the cost will be heavy. In the steel industry alone, the elimination of overcapacity could cost as many as 400,000 jobs.

The desire to retain political power might mean China will keep postponing the pain needed to regain financial health. The risk is that further postponement could lead to the bursting of its economic bubble and the world could experience another global recession that will be made in China. –Elfren S. Cruz (The Philippine Star)